4.3 Listing and Sales Contracts and Contingencies

Listing agreements employ the broker; purchase agreements move the property. The exam tests the differences among listing types, the required contents of a sales contract, and how contingencies allocate risk.

Listing Agreement Types

A listing is an employment contract between a seller and a broker. The four classic forms differ in who earns the commission.

• Exclusive right to sell - one broker is owed the commission no matter who procures the buyer, including the seller. This is the most protective listing for the broker.
• Exclusive agency - one broker is appointed, but the seller owes no commission if the seller personally finds the buyer.
• Open listing - the seller may engage several brokers, and only the broker who actually procures the buyer is paid. It is unilateral.
• Net listing - the seller sets a net amount and the broker keeps any excess as commission. South Dakota licensees may not take a net listing under SDCL 36-21A-71(26).

Table: Who gets paid?

Required Terms of a Purchase Agreement

Because a sale of land falls within the statute of frauds, the purchase agreement must be in writing and signed. To be enforceable it must contain the essential terms:

1. Identifiable parties - the buyer and seller named.
2. Property description - enough to identify the parcel, ideally the legal description.
3. Price and terms - the amount and how it will be paid or financed.
4. Signatures - of the party to be charged.

Many agreements add the earnest-money amount, closing date, prorations, the type of deed, and contingencies, but a court enforces the deal on the essential terms above.

Contingencies

A contingency is a condition that must be satisfied or waived before a party is obligated to close. It protects the party who needs something verified. If the condition fails and is not waived, that party may usually cancel and recover the earnest money.

Common contingencies:

• Financing - the buyer must obtain a loan on stated terms by a deadline.
• Inspection - the buyer may inspect and object to defects within a set period.
• Appraisal - the property must appraise at or above an agreed value.
• Sale-of-current-home - the buyer's obligation depends on selling an existing home.

A contingency is satisfied when the condition is met, waived when the protected party gives it up in writing, or failed when the deadline passes unmet. A waiver is a deliberate choice and removes the escape route, so it is the riskiest move for a buyer.

Worked example: appraisal gap

A buyer agrees to pay $350,000 with a financing contingency and a 20 percent down payment, expecting a $280,000 loan. The appraisal returns at $335,000, so the lender will finance only 80 percent of $335,000, or $268,000. The buyer now faces a $15,000 gap: either bring an extra $15,000 in cash, renegotiate the price, or, if an appraisal contingency exists, cancel and recover the deposit. Without an appraisal contingency, refusing to close could forfeit the earnest money.

Options and Rights of First Refusal

An option contract gives the optionee the right, but not the obligation, to buy at a set price within a set time. The optionor (owner) is bound to sell if the option is exercised; the optionee pays option consideration for that right and may simply walk away.

A right of first refusal is weaker. The holder cannot force a sale; the right activates only when the owner decides to sell, giving the holder the chance to match a bona fide offer first. Compare: an option fixes price and timing now, while a right of first refusal waits on the owner's decision to sell.

Common Exam Traps

• Confusing exclusive agency (seller can self-sell commission-free) with exclusive right to sell (broker always paid).
• Forgetting that South Dakota treats taking a net listing as unprofessional conduct.
• Treating a waived contingency as still protecting the buyer - waiver gives it up.
• Mixing up an option (buyer controls the trigger) with a right of first refusal (owner controls the trigger).
• Assuming a verbal purchase agreement is enforceable - the statute of frauds requires writing.

Listing agreement types and contingencies

Listing agreements differ in how the commission is earned. An exclusive-right-to-sell listing pays the listing broker no matter who finds the buyer, including the seller, and is the type most brokers prefer. An exclusive-agency listing pays the broker unless the seller personally finds the buyer, in which case no commission is owed. An open listing lets the seller engage multiple brokers and pays only the one who procures the buyer, with no commission if the seller sells alone.

Sales contracts hinge on contingencies, conditions that must be met before the parties are bound to close. The most common are the financing contingency (the deal proceeds only if the buyer obtains a stated loan), the inspection contingency (the buyer may cancel or renegotiate after a satisfactory inspection), the appraisal contingency (the property must appraise at or above the price), and the sale-of-buyer's-home contingency. Each contingency has a deadline; if the protected party does not satisfy or waive it in time, the contract may terminate with the earnest money returned.

Because real estate sales must be in writing under the statute of frauds, a purely verbal purchase agreement is unenforceable, and oral changes to a written contract generally are not binding.